Mortgage Mike’s Daily Rate Commentary

Stocks rallied in late day trading yesterday, causing the expected upward pressure to mortgage interest rates. However, stocks opened the day weak and are currently close to the intra-day lows of yesterday. This continued weakness and volatility in the stock market brings into question whether we are experiencing early signs of a broader correction, or if this is just a healthy retracement that will be followed by a strong run in the stock market. Since the losses are still within the boundaries of a healthy retracement, we must assume that is the case. Corrections are rare, but retracements are common. We have a greater chance of stocks making a strong come-back than having this be a correction. However, the longer this goes on, the more dangerous the situation for the US stock market. Further, stocks have not been this far beneath their 200-day moving average in years. This is certainly a huge risk to stock investors.

Weak housing data has fueled anxiety over the US housing market. Higher mortgage interest rates and rising home prices continue to threaten the stability of the housing sector. Housing is generally a leading indicator of a recession. However, many economists don’t see the housing market as falling in the next recession. Personally, I don’t agree with such experts. I believe we are currently in the early stages of a housing correction that will either lead to lower housing prices and/or mortgage interest rates falling. I don’t believe the housing market will be able to sustain continued rising interest rates combined with a rapidly appreciating housing market. Something will be forced to give.

Again, we need to be prepared for stocks to make a come-back. We will maintain our locking bias.

Stocks are once again down sharply, with the DOW falling 500 points in early day trading. The S&P 500, which is my primary data source for tracking stocks, is currently beneath its 200-day moving average once again. In fact, it is now further below this critical trend line than it has been in several years. If stocks continue to fall, and open lower again tomorrow, this could spell trouble for US stock markets going forward. However, the reality is that stocks have only lost just over 50% of their recent gains, which means this could just be a normal mid-rally course correction. My guess is that we will see stocks recover here in the near term and move up strongly thereafter. If I’m wrong, and stocks continue to slide, we will see interest rates improve. But as I mentioned, I wouldn’t count on that.

The fall in the global stock market brings many to question whether this is a short-term retracement, which is healthy, or if the stock markets are finally recognizing the impact of the Federal Reserve rate hikes over the past year. If it is the latter, we will know here very soon. Stocks here in the US have already nearly wiped out all the gains of 2018, and in Europe have wiped out gains made in both 2017 and 2018. If large hedge funds begin to dump stocks at high levels, we could see the losses perpetuate further. Sit back, grab some popcorn, and let’s see how this plays out.

Although there is no need to immediately rush to lock, I feel confident we will see stocks improve. This will hurt the bond market and create upward pressure on interest rates. I feel the prudent move is to maintain a locking bias.

With mortgage interest rates sitting right at seven-year high levels, it’s critical that bonds hold their ground and not fall any lower. If we do see bonds break lower, there is a lot of room for bond prices to move to the downside. This would put us at new multi-year high interest rates. Much of this will likely depend upon the near-term direction of the stock market. If stocks continue to fall, that could help support bond prices and allow mortgage interest rates to soften.

Stocks are once again texting their 200-day moving average. This has now happened multiple times in recent days. With each test, the support level become a little weaker. Since stocks have not decisively been beneath this critical level in many years, this could be an important time in stock market history. With the stock run exceeding ten years, we are getting closer to the point at which a downturn is imminent. All things must fall eventually. The stock market is no exception.

With bonds still trading in a predictable range, we are waiting to see which direction they will move next. I feel it is likely we will see rates get a little higher before improving. In the meantime, we will maintain a locking bias.

It looks like the Dow and S&P 500 are trying to end the week in the green; but hovering in their 200-day moving average can’t leave investors feeling too convinced that this is a turning point back up. A convincing break below this area will likely lead to strong sell off. Mortgage bonds are in the red again, and that makes it 10 trading days in a row since interest rates have moved to their new respective higher range.

There was not much news to move the markets with any conviction today, but there were a few housing reports of interest. Existing home sales and existing sales % change for September both came in below expectations. This is just another report that lends itself to the growing concern that housing prices may have topped out. While that’s a glimmer of hope for buyers, affordability is still an issue since interest rates have moved up and look to push higher.

The stock market recovered all its losses in late day trading yesterday, closing right beneath its 100-day moving average. This level has proven to be a strong ceiling, with stocks being unable to break above it once more. Stocks are pointed lower in early market trading so far today, which means stocks will likely trend down to once again test the 200-day moving average. Eventually, this barrier will be decisively broken, and stocks will fall sharply below this formidable moving average that has been in place for several years. When that happens, we will see downward pressure on mortgage interest rates. Although I still don’t believe the time in now, it is coming. Consider locking in a no cost mortgage rate vs paying to achieve a lower interest rate. It may prove to be the best strategy.

Yesterday’s Federal Reserve Meeting Minutes showed that the Fed is determined to move into a “restrictive” environment to help slow the pace of economic growth. For many years, we became accustomed to an “accommodative” stance, where the Fed policy was geared to help stimulate growth. It has since moved into a neutral stance, where it still had accommodations, but was also heading down the path of raising interest rates. It seems that the plan for the near future is to be in a “restrictive” stance, which means we can expect to see the pace of rate hikes continue. This is not good news for the US stock market or bond market. However, it will eventually be a strong detriment to stocks.

The stock market volatility is in full force once again this morning, with stock prices currently down sharply in early morning trading. Since this is following one of the strongest single days in recent months, that isn’t a big surprise. In fact, stock prices came within a stone’s throw of hitting their 100-day moving average, which we identified in yesterday’s update as being the next ceiling of resistance. From a technical perspective, we can lose up to 50% of the recent day’s gains and still be amid a strong drive higher. If we lose 50% of this level, we can expect prices to recover and take another jump higher. Therefore, don’t look for today’s stock slump to last.

Investors are awaiting today’s meeting minutes from the most recent Fed meeting to see if there is any new data released that could impact the market’s current expectation of future rate hikes. With President Trump stepping up his opposition to the “gradual hike” plan, it will be interesting to see if this deters the Fed’s path. Personally, I don’t expect to see the Fed bow down to the President, as they are sworn to not be influenced by a political agenda. We will have to see if this is in fact the case.

Although mortgage bonds are doing well currently, I foresee stocks turning higher once they have lost 50% of the recent gains. This will likely add downward pressure to mortgage bond pricing, which will put upward pressure on interest rates. Therefore, we will maintain a locking bias.

As expected, the stock market is wildly higher today. After breaking back above its 200 day moving average, the technical climb higher kicked in to full speed. We can now expect the stock market to move up towards the next ceiling of overhead resistance, which will be found at the 100 day moving average. However, that gives stock investors a ways to go before they need to be overly concerned. This will generate a lot of profits for stocks in the meantime. Now that stocks are climbing higher, we can expect to see a strong headwind for mortgage bonds, as investors will choose to put their money in the stock market rather than the bond market.

The Federal Reserve is continuing to lessen their purchases of mortgage backed securities. As the months go on, the amount of reinvestments the Fed is planning on making into the bond market will continue to fall. By taking out what has been the strongest buyer in the mortgage bond market, we can expect the prices of mortgage bonds to fall until a new equilibrium is established. This will drive mortgage interest rates even higher in the near-term. Add to this the combined effort by the Fed of also raising short-term interest rates, and you have a perfect recipe that will lead to higher mortgage rates.

Given the strength of the stock market rally, we will maintain our locking bias.

Mortgage bonds are near flat on the day so far, as bond investors wait for the stock market to decide on its direction. As expected, stocks closed above their 200 day moving average on Friday. Since it has been years since stocks have decisively been below this critical moving average, we can anticipate stocks to climb higher in the near-term. However, eventually there will come a day when the stock market falls below its 200 DMA. Could that day be soon? Although the market is showing signs of growing tired, I don’t believe the time is now. If I am wrong, however, and stocks fall in the near-term, we will likely see mortgage interest rates improve. Since a breakout is the exception and not the rule, we shouldn’t plan on that anytime soon.

In other news, Retail Sales for the month of September came in at just 0.1%, which was well below the 0.6% gain the market was anticipating. This shortfall was widely due to lower than expected auto sales. Since this is a critical indication of economic growth, it is concerning to see such a low report. However, with the Christmas season around the corner, this will likely tick higher in the months to come.

With average mortgage interest rates now as high as they have been since 2011, consumers are having a difficult time adjusting to a 5% range mortgage. This is helping to attribute to concerns over a slowing housing market. A “shift” from a seller’s market into a neutral market is now underway, with expectations of a buyer’s market coming. Now is a great time to sell.

Given the continued weakness in the bond market, we will maintain a locking bias.

This morning’s headlines read “US stocks rebound” as the Dow opened 300 points higher after 2 days of the biggest drops we’ve not seen since February. But now, a few hours into the trading day and most of the gains are gone. The Dow has given back around 50% of its gains this year, so a definitive break below this point and its likely a drop down to the next level last seen in July. What took 3 ½ months to gain might be given back in just 7 trading days. Today’s shift in momentum from opening higher and now moving back to the red potentially, is an indication that investors are just not sure that they like the idea of markets running more on their own without the Fed ready to subsidize any potential obstacle.

What has this meant for mortgage rates? At the moment, they have stopped their definitive move higher; at least for the last few days stocks have been selling off. The concern is always trying to determine if this is just a pause before the next leg higher, or could it be a reversal to rates moving lower? We will have to take our cue from the stock market direction, but the dominant trend for rates is still higher, so we will maintain a locking bias.

Mortgage bonds are higher this morning, as news of a tame Consumer Price Index (CPI) report filters through investors. Headline CPI increased by 0.1% in the month of September, which was below the 0.2% growth rate anticipated. On a year-over-year basis, the reading dropped from 2.7% down to 2.3%. However, the move lower was widely influenced by energy prices, which fell by 0.5%. The lower level of inflation should be a sign to the Federal Reserve that the continued rise in the Fed Funds rate has so far kept inflation at bay. The concern will be that rate hikes will continue until a forced slow-down in the overall economy occurs. That has President Trump criticizing the continued rate hikes, as he feels the Fed should hold off until we see inflation levels move higher.

After taking deep losses yesterday, the stock market is continuing to slide lower so far this morning. Currently, the S&P 500 is beneath its 200-day moving average. Since it has been years since stocks have been decisively below this level, this move is likely going to be very short lived. As a result, there is a strong likelihood that we will see stocks climb higher as the day wears on. If stocks do happen to close beneath this critical level, which I don’t believe will happen, tomorrow will be a critical day for stocks. If they start to fall from here; watch out. Stocks would be in for an ugly ride if that were to occur.